Subbarao Says Policy-Easing Room Is Practically Non-Existent

May 6 (Bloomberg) -- India’s central bank governor signaled
the nation has almost no space left to ease monetary policy
further, following the third interest-rate cut this year to
bolster a struggling economy.

“Baseline case is that the possibility of easing is
practically non-existent,” Duvvuri Subbarao said in a Bloomberg
TV India interview in Mumbai on May 4. Any expectation that the
central outlook is for “another salvo” of loosening is
“inaccurate,” he said, adding inflation and the current-account deficit will determine the path of monetary policy.

Subbarao lowered the repurchase rate to 7.25 percent from
7.50 percent on May 3, the third straight quarter-point cut,
extending the only reduction in borrowing costs in major
emerging nations in 2013. The Reserve Bank of India is trying to
spur investment and consumption to revive an economy that
expanded last fiscal year at the weakest pace in a decade.

“The RBI is attempting to anchor market expectations
towards a more neutral stance,” said Rajeev Malik, an economist
at CLSA Asia-Pacific Markets in Singapore. “Monetary easing
can’t be the panacea for reviving India’s economic growth,
especially when retail inflation is off the charts.”

The yield on the government note maturing June 2022 rose 1
basis point, or 0.01 percentage point, to 7.75 percent as of
11:02 a.m. in Mumbai. The rupee gained 0.1 percent to 53.89 per
dollar, while the S&P BSE Sensex index rose 0.4 percent.

Capital Flows

“Extraordinary quantitative easing” in advanced nations
has helped to finance the current-account imbalance, Subbarao
said. At the same time, any unwinding of money-printing
policies, or other shocks to the global economy, may affect
capital flows to India, he said.

The current-account gap swelled to $32.6 billion in the
quarter ended Dec. 31, or a record 6.7 percent of gross domestic
product, stoked by gold and oil imports and subdued exports.

“It’s reasonably probable, if not in 2013, but certainly
in 2014,” Subbarao said, referring to the possibility of
outflows. “We got to be prepared for it and the way to prepare
for it is to reduce the current-account deficit and increase the
flow of non-debt-creating, stable capital flows into the
economy.”

Inflation based on wholesale prices eased to 5.96 percent
in March, a 40-month low. Food costs have a heavier weighting in
the consumer gauge, which surged 10.39 percent in the same month
from a year earlier.

Need for Vigilance

“Should the upside risk factors to inflation materialize,
we’ll have to be vigilant to that and we’ll have to respond to
that,” Subbarao said. If the current-account deficit
deteriorates “more than we projected in our internal
calculations, then we’ll have to react to that,” he said.

“On the other side, should CAD become more benign than we
expect, should inflation come down faster than we factored in,
should other risk factors, for example, supply constraints in
the economy, investment sentiment become more benign, there will
certainly be space for easing,” Subbarao said.

The Reserve Bank said after the May 3 policy decision that
there is “little space for further monetary easing,” citing
the possibility of a resurgence in inflation pressures and a
current-account shortfall it described as “by far the biggest
risk to the economy.”

Indian gross domestic product rose 5 percent in the year
ended March, the least since 2003, according to an estimate from
the statistics agency. Moderating investment, an extended fight
against inflation and a drop in exports hurt the expansion in
Asia’s No. 3 economy.